September 2009



SKU Rat is Coming, Do You Know Where You Stand?
By Paul Weitzel




The Benefit
Better holding power on ...
Momentum is Building                            assortment and have more variety in categories they can win in
(Cont.)    ...
Why This is Real                                Over the years, our industry has come together at conferences and
        ...
Where Do Your Categories                                Working Capital (Inventory) - What is the inventory costing
and Br...
Looking Ahead                                   Thirty years ago, stores turned 12.5 times a year. Today, stores
         ...
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Sku Rat Is Coming - Willard Bishop Competitive Edge

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Sku Rat Is Coming - Willard Bishop Competitive Edge

  1. 1. September 2009 SKU Rat is Coming, Do You Know Where You Stand? By Paul Weitzel The Benefit Better holding power on big brands. Fewer out-of-stocks and lost sales. Sections that are easier to shop. Fewer unsaleables and returns. Less store labor and more than $100,000 per store in freed-up capital. These are the key benefits of getting assortment right and eliminating a large amount of duplication and underperforming sections in our stores. Retailers who continue to struggle in this current economic climate and other leading chains who are looking to put some distance between themselves and their competitors see an opportunity to do a better job with rationalizing assortment to improve their current financial position. This issue of Competitive Edge looks at the SKU rationalization movement and how this is likely to impact retailers, suppliers, and categories. Momentum is Building Have you heard that we are officially out of the recession? Don’t tell that to retailers who are on the front line. From large chains to small independents, the economy has negatively impacted same- store sales by several percentage points and retail executives don’t see a turnaround anytime soon. Some retailers are starting to sell off underperforming units while others are looking to cut store operating costs. One cost reduction strategy that is getting a lot of attention is SKU rationalization. I’m now getting calls on a weekly basis from CPG companies returning from important customer meetings with serious concerns that they may be losing a brand to SKU Rat. We’re not talking about a few SKUs. CPG companies are facing the possibility that they may lose an entire line and this isn’t happening only at Walmart. All retailers have to take control of their store operating expenses and there are only a handful of expenses that are variable and can be reduced. In addition to labor, assortment and inventory is an area that they can attack today to reduce costs. In the past, reducing assortment was not considered an option. However, this is a different retail environment and reducing store-level assortment will become an increasingly viable option for retailers. SKU Rat is playing out along several fronts. Walmart is planning on slashing assortment levels 15% to 18% as part of their new Win/Play/Show category strategy. Their goal is to rebalance © Copyright 2009 Willard Bishop. All rights reserved. 1
  2. 2. Momentum is Building assortment and have more variety in categories they can win in (Cont.) and less in categories that are significantly more challenging. Win Categories – Categories that generate high growth, are large in size, and are credible with Walmart shoppers. These are the categories where Walmart will lead in assortment, prices, and advertising and merchandising. Play Categories – These categories have some, but not all, of the characteristics associated with Win categories. For example, they may be credible with shoppers and are large, but they may not offer strong growth opportunities for Walmart. These generally are not the destination categories. Show Categories – These categories are the direct opposite of the Win categories. They lack growth, size/scale, and Walmart tends to be less credible in these categories with shoppers. The categories that get flagged with a Show label will experience a significant decline in assortment and number of brands. By focusing more on the categories they can win, Walmart will shift inventory to more productive space and drive down working capital and inventory carrying costs in other areas of the store that are less productive. Other chains are looking to reduce costs by improving their packout levels. For example, Kroger is moving from 1.2 cases on the shelf back up to a 1.5 case pack rule. In addition, they are in discussions with suppliers to reduce case pack sizes so they can meet the 1.5 case pack rule with fewer shelf facings. The goal is to improve in-stock positions of power SKUs and lower store labor costs. They expect to experience fewer shelf “touches” and fewer trips to the backroom to deal with backstock inventory and reworked product that, in the past, could not fit on the shelf. Small Box formats in the 15,000 to 25,000 square foot range will continue to emerge and create new opportunities with a limited assortment lineup. While retailers are still fine tuning this express store, we expect this format will emerge as a viable offering for retailers looking to offer a convenient shopping experience. Some of these stores will represent net new real estate but others will take the place of closing stores. With limited shelf space, fewer brands end up making it on the shelf. Lifestyle stores and stores interested in creating greater excitement on the perimeter will continue to shrink center store space by 15% to 20% to make room for expanded theater. While the economy will slow this trend, we do expect a portion of retail stores to continue pursuing an expanded perimeter strategy in an effort to strengthen their store loyalty. All of these trends will have a direct impact on product assortment. While we expect to see less variety, it’s the complete elimination of brand lines that’s getting everyone’s attention and is unprecedented in the 20+ years that I’ve been consulting in the grocery industry. © Copyright 2009 Willard Bishop. All rights reserved. 2
  3. 3. Why This is Real Over the years, our industry has come together at conferences and talked about the need to reduce product duplication and get to optimal assortment levels on a store-by-store basis. We have completed study after study that has shown that consumers like sections that are easier to shop and, more often than not, they cannot tell when we reduce assortment levels in a category. And, trading partners have gone through extensive efficient assortment training. We even have very sophisticated tools and analytical methodologies today to adjust assortment store-by-store. But what’s different this time around is retailers are feeling severe financial pressures that are forcing them to act. The long-term economic outlook is not good and many companies are forecasting no growth over the next five years. If retailers see very little sell- side opportunities, they will need to act to reduce their operating expenses, and one clear way is to reduce their working capital. Retailers who have a strong price reputation like Walmart are in a better position to leverage reduced assortment than many other grocers whose shopper value equation is based on variables other than price. Supermarkets who count on expanded assortment as part of their shopper value equation will need to be smarter about the SKU Rat approach they take. The opportunities are definitely there, but straight across-the-board cuts will not work. Nor does it make sense just to cut the big categories that take up a lot of space. Retailers lose money today on 25% of the categories and more than half of the SKUs in the center store. We have conducted total store analyses for Safeway, Kroger, Ahold, and SUPERVALU and we consistently see the challenges big box supermarkets face. Even well-run stores and strong centralized category management programs have not been able to slow down the insatiable appetite suppliers have for space. In many cases, we simply slice the pie thinner when line extensions and non-value-adding SKUs make their way on to the retail shelf. There is a huge cost for adding new items that lack real innovation. It affects supply chain efficiencies and reduces consumer/shopper satisfaction. Getting space at all cost is a thing of the past and retailers are beginning to drill deeply into the dead zones and non-value-added sections of the store to free up capital and eliminate costs. Where Do Your Categories So, the big question is: Do you know where you stand? Do you and Brands Fall? know your Variety Score, and are your categories and brands vulnerable to SKU Rat? To determine category and brand vulnerability, it’s important to look at key leading measures that, taken together, put clarity on real contribution to space and retailer ROI. The leading measures we look at and questions we answer are: Variety (Consumer) – What do we need to meet consumer demand? Profitability (Money) - How much money do we make? Productivity (Shelf) - How productive is the space? © Copyright 2009 Willard Bishop. All rights reserved. 3
  4. 4. Where Do Your Categories Working Capital (Inventory) - What is the inventory costing and Brands Fall? (Cont.) and what is the ROII? YAGO (Growth) - Is the category growing or declining? Developing a score for each of these leading measures and then understanding how they, in totality, compare across categories and brands produces a clear roadmap to prioritizing SKU Rat decisions. It helps to ensure that productive pieces of real estate inside the store are not affected before unproductive pieces of real estate. Based on our Variety Scoring system, here are some of the top food categories that may be vulnerable to SKU Rat.: Bottled Water Carbonated Beverages Cookies Ethnic/Specialty Fabric Softener Frozen Poultry-Meat Mexican New Age Beverages Salad Dressing Vinegar Source: Willard Bishop 2009 Total Store SuperStudy™ Some of the top non-food categories vulnerable to SKU Rat include: Adult Nutrition Baby HBC Bath Cosmetics Diet Aids Grill Accessories Lawn & Garden Pet Supplies Skin Care Soap Source: Willard Bishop 2009 Total Store SuperStudy™ © Copyright 2009 Willard Bishop. All rights reserved. 4
  5. 5. Looking Ahead Thirty years ago, stores turned 12.5 times a year. Today, stores still turn 12.5 times a year. That means we’ve made no real progress in improving inventory levels in the past 30 years. This is a big area that we can improve on and a few traditional grocers are beginning to put in place the mechanisms to improve payment terms and reduce shelf inventory so they can get the cost of their payables covered, just like Walmart. Expect less assortment and lower store inventory levels in the next several years as grocers look to reduce costs. SKU Rat is usually a difficult discussion to have on the supplier side. The thirst for more items and more shelf space is always strong and rarely can suppliers reduce this thirst. Company business models are built on growth and growth is hard to come by without adding new products and lines. However, significant opportunities can be had by getting out in front of the SKU Rat movement. Put yourself in a position to not only know where you stand, but more importantly, develop a strategy to help retailers make space more productive. Those companies that do are finding they can win fair share of shelf and actually improve their overall financial position. They are also in a stronger position to navigate through these turbulent times. Next Steps To learn more about your category Variety Score and what strategies you should develop to defend or promote SKU Rat across your categories, contact Paul Weitzel at (847) 756-3717, or paul.weitzel@willardbishop.com. For more information on Willard Bishop’s 2009 Total Store SuperStudy™, please contact Jackie Gray at (847) 756-3718 or jackie.gray@willardbishop.com. Willard Bishop’s Product Offers: Total Store SuperStudy™ - The Total Store SuperStudy™ is the most comprehensive information on total store performance in the supermarket industry today. The study is completed every two years and provides visibility into the performance of every category and sub-category across three leading supermarket chains, delivered through a robust online web application. Private Brand Performance Gauge™ - The Private Brand Performance Gauge™ helps you understand the profitability of private brands, by category, so you can drive category performance and better understand the potential impact of private brands on your business. Delivered through a white paper and a set of analytic scorecards. To learn more, contact Jackie Gray – 847-756-3718 – jackie.gray@willardbishop.com If you wish to gain access to past Competitive Edge publications, please visit our website at www.willardbishop.com and click on "Downloadable Insights," and log-in or register. © Copyright 2009 Willard Bishop. All rights reserved. 5

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